Canada

USMCA review looms large amid trade tensions and a push for diversification

Trade talks between Canada and the US are expected to be conditioned by on-and-off cycles of escalation and détente in the run up to the USMCA review talks in July 2026. The agreement has been instrumental for keeping Canada one of the less tariffed jurisdictions, since compliant exports (85% of total) are exempted from most of the Trump administration’s tariff regime (including the country-specific IEEPA tariffs and certain sector tariffs such as section 232 on vehicles and auto parts) at the time of writing. However, this can change as the US puts further pressure in the run-up to July 2026, especially if Canada sticks to a hardball approach. Our working assumption is that the agreement will survive, though it is harder to say if in the form of a full extension (from 2036 to 2042) or subject to another revision in 2027. The US is likely to demand increased market access for dairy, poultry and eggs and stricter US / regional content requirements, which will be hard to sell domestically.

In parallel, Canada will pursue efforts to rebalance foreign trade in the direction of greater geographical diversification. Closer ties to Europe will be the most straightforward to implement, by fully exploiting the Comprehensive Economic and Trade Agreement. The relationship with China, however, is at a crossroads. On one side, Chinese demand for LNG will be key for diversifying energy trade. However, the US will likely expect Canada to replicate its protectionist stand vis-à-vis China. It would not be the first time that Canada is caught in the crossfire between China and the US. Canada’s mirroring of the Biden administration’s 2024 tariffs on EVs led China to retaliate with tariffs on agricultural exports. Plus, Mexico’s wide-ranging tariffs on China introduced in September 2025 set a precedent. Otherwise, progress is being made in normalizing the relationship with India, which had notoriously deteriorated after the assassination of an exiled Sikh leader on Canadian soil in 2023.

PM Mark?Carney of the centreleft Liberal Party (170 /343 seats) heads a fragile minority government that relies on adhoc support from the regionalist Bloc Québécois (22) and the leftwing New?Democratic?Party (7). Minority governing arrangements are relatively common in Canada, and for the moment the public would likely punish any party that threatens continuity and stability. But with the next federal election in 2029, early elections are a risk worth monitoring.

Trade uncertainty continues to weigh on an underperforming economy

Thanks to the USMCA exemption, Canada’s observed tariff rate is the lowest among the US’s major trading partners (3%, vs 10% world average). However, specific, particularly targeted industries are suffering acute damage, such as autos, steel/aluminum and wood. More materially, the prospect of continued escalation in the trade war and a breakdown of USMCA is inciting a wait-and-see attitude among consumers and investors. Exports to the US represent 76% of the total, and 20% of GDP. Though the economy is narrowly avoiding technical recession, it is expected to perform below potential for a second consecutive year. Furthermore, the ongoing global oil glut should keep export prices contained. Regions are unevenly exposed to the trade war, with Ontario and Quebec suffering from their reliance on auto and metals, while regions specialized in extractive industries (Alberta, Saskatchewan) are better protected.

With the impact of the trade war targeted rather than widespread, spillovers to the services sector and the overall job market have been limited so far. Domestic tourism has benefited from Canadians cutting southbound travel by 30%. The contribution of domestic consumption should be positive but modest by historical standards, limited by weakening population growth. We estimate that unemployment has peaked and is expected to decline, while staying elevated by the standards of the recent decade, above 6%. Due to front-loaded spike in exports early in 2025, 2026 should be the first full year where exports are suppressed. Conversely, we do not assume additional significant retaliatory tariffs on the U.S. and thus see little room for imports to decrease further. Hence, we expect the contribution of net exports to remain negative. Momentum in residential investment is projected to build in 2026, supported by government housing measures programs (expanded public housing, zoning and permitting deregulation) and declining borrowing costs. The noticeable boost to public infrastructure investment will provide a rich project portfolio (LNG pipelines, Quebec port expansion, Darlington nuclear plant) that will support non-residential investment. Inflation should remain close to 2%, with a minor uptick in the second quarter of 2026 as the temporary effect of eliminating the federal fuel charge diminishes. The central bank is expected to hold rates broadly constant at a slightly accommodative-to-neutral stance.

Twin deficits: the price of the trade war

The fiscal framework for 2026 and onwards is heavily shaped by the need to diversify the country’s growth model away from US exports. Capital spending is expected to ramp up to 1.4% of GDP in 2026, and 1.6-1.7% in 2027-2030; up from an average 1% in the 2020-2025 period. These initiatives mainly aim to strengthen the defense and industrial base, building housing/ hospitals / transport infrastructure, and tax incentives for private CAPEX (expensing, R&D subsidies). To offset part of this push, budget aims to severely cut operational spending, mostly focused on reducing the civil service from a recent peak of 368,000 in 2024 to 330,000 by 2029. Departments (excluding defense, police and border security) are targeted for 7.5% cuts in 2026–27, escalating to 10% in 2027–28, and reaching 15% in 2028–29. However, this should only amount to savings worth 1.8% of 2025 GDP over 5 years, compared to 5% of GDP in additional expenditures, broadly doubling the size of budget deficits over the near term compared to the previous policy configuration. The risks from this leveraging are substantially mitigated by liquid asset holdings.

The trade war, the increased demand for investment and depressed commodity prices are putting downward pressure on the current account balance, which should worsen slightly. Goods exports are not expected to recover meaningfully until late 2026 , and infrastructure and defense spending will create meaningful import needs in machinery & equipment. The services deficit, however, is expected to improve and move closer to balance, on account of an improved net tourism balance. Gross external debt is rather high (145% of GDP), but the net international investment position is firmly in surplus at 61% of GDP.

Payment

A single law governs bills of exchange, promissory notes and cheques throughout Canada; however this law is frequently interpreted according to common law precedents in the nine provinces or according to the Civil Code in Quebec. As such, sellers are well advised to accept such payment methods unless where long-term commercial relations, based on mutual trust, have been established with buyers.

Centralised accounts, which greatly simplify the settlement process by centralising settlement procedures between locally based buyers and sellers, are also used within Canada.

SWIFT bank transfers are the most commonly used payment method for international transactions. The majority of Canadian banks are connected to the SWIFT network, offering a rapid, reliable and cost-effective means of payment, notwithstanding the fact that payment is dependent upon the client’s good faith insofar as only the issuer takes the decision to order payment.

The Large Value Transfer System (LVTS) –introduced by the Canadian Payments Association in February 1999 – is a real time electronic fund transfer system that facilitates electronic transfers of Canadian dollars countrywide and can also handle the Canadian portion of international operations.

The letter of credit (L/C) is also frequently used.

Debt Collection

Canada’s Constitution Act of 1867, amended in April 1982, divides judicial authority between the federal and provincial Governments. Therefore, each province is responsible for administering justice, organizing provincial courts and enacting the civil procedure rules applicable in its territory. Though the names of courts vary between provinces, the same legal system applies throughout the country, bar Quebec.

Within each province, provincial courts hear most disputes of all kinds concerning small claims, and superior courts hear large claims – for example, the Quebec superior court hears civil and commercial disputes exceeding CAD 70,000 and jury trials of criminal cases. Canadian superior courts comprise two distinct divisions: a court of first instance and a court of appeal.

At federal level, the Supreme Court of Canada, in Ottawa, and only with “leave” of the Court itself (leave is granted if the case raises an important question of law), hears appeals against decisions handed down by the provincial appeal courts, or by the Canadian Federal Court (stating in appeal division), which has special jurisdiction in matters concerning maritime law, immigration, customs and excise, intellectual property, disputes between provinces, and so on.

The collection process begins with the issuance of a final notice, or “seven day letter”, reminding the debtor of his obligation to pay together with any contractually agreed interest penalties.

ORDINARY PROCEEDINGS

Ordinary legal action – even if the vocabulary used to describe it may vary within the country – proceeds in three phases.

Firstly, the “writ of summons” whereby the plaintiff files his claim against the defendant with the court, then the “examination for discovery”, which outlines the claim against the defendant and takes into account the evidence to be submitted by each party to the court and, finally, the “trial proper” during which the judge hears the adverse parties and their respective witnesses, who are subject to examination and cross-examination by their respective legal counsels, to clarify the facts of the case before making a ruling.

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Enforcement of a Legal Decision

In most cases, except when the judge decides otherwise, each party is required to bear the full cost of the fees of his own attorney whatever the outcome of the proceedings. As for court costs, the rule stipulates that the winning party may demand payment by the losing party based on a statement of expenses duly approved by the court clerk.

The change precisely concerns institution of a standard “originating petition” (requête introductive d’instance), with the payment of judicial costs joined, introducing a 180-day time limit by which the proceedings must be scheduled for “investigation and hearings” (pour enquête et audition), delivery of a judgement on the content within a timeframe of six months after the case was heard and encouragement of the parties to submit to a conciliation stage during legal proceedings, with the judge presiding over an “amicable settlement conference” (conférence de règlement à l’amiable).

Insolvency Proceedings

The two primary pieces of insolvency related legislation in Canada are the Companies' Creditors Arrangement Act (the CCAA) and the Bankruptcy and Insolvency Act (the BIA). The BIA is the principal federal legislation in Canada applicable to bankruptcies and insolvencies. It governs both voluntary and involuntary bankruptcy liquidations as well as debtor reorganisations. The CCAA is specialized companion legislation designed to assist larger corporations to reorganise their affairs through a debtor-in-possession process.

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Last updated:December 2025